Item 1. Financial Statements
SPS
COMMERCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except share amounts)
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June 30,
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December 31,
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2017
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2016
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ASSETS
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CURRENT ASSETS
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Cash and cash equivalents
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$
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131,744
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|
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$
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115,877
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Short-term marketable securities
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26,896
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23,076
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Accounts receivable, less allowance for doubtful accounts of $790 and $515, respectively
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21,545
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20,746
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Deferred costs
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21,917
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19,224
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Other current assets
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6,955
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7,010
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Total current assets
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209,057
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185,933
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PROPERTY AND EQUIPMENT, net
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15,527
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15,314
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GOODWILL
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50,766
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49,777
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INTANGIBLE ASSETS, net
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18,484
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19,788
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MARKETABLE SECURITIES, non-current
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4,997
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7,494
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OTHER ASSETS
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Deferred costs, non-current
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6,419
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6,086
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Deferred income tax asset, non-current
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27,524
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12,446
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Other non-current assets
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1,098
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1,527
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Total assets
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$
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333,872
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$
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298,365
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LIABILITIES AND STOCKHOLDERS EQUITY
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CURRENT LIABILITIES
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Accounts payable
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$
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2,720
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$
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2,302
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Accrued compensation
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13,243
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13,740
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Accrued expenses
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3,723
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3,508
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Deferred revenue
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16,624
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11,055
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Deferred rent
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1,606
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1,556
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Total current liabilities
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37,916
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32,161
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OTHER LIABILITIES
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Deferred revenue, non-current
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11,050
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10,847
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Deferred rent, non-current
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3,899
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4,179
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Deferred income tax liability, non-current
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1,977
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1,911
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Total liabilities
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54,842
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49,098
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COMMITMENTS and CONTINGENCIES
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STOCKHOLDERS EQUITY
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Preferred stock, $0.001 par value; 5,000,000 shares authorized; 0 shares issued and
outstanding
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Common stock, $0.001 par value; 55,000,000 shares authorized; 17,221,798 and
17,081,145 shares issued and outstanding, respectively
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17
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17
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Additional paid-in capital
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292,533
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286,315
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Accumulated deficit
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(12,665
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)
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(33,739
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)
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Accumulated other comprehensive loss
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(855
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)
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(3,326
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)
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Total stockholders equity
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279,030
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249,267
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Total liabilities and stockholders equity
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$
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333,872
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$
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298,365
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See accompanying notes to these condensed consolidated financial statements.
3
SPS COMMERCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited; in thousands, except per share amounts)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2017
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2016
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2017
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2016
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Revenues
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$
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54,284
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$
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47,351
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$
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106,216
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$
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92,950
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Cost of revenues
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18,191
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15,972
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35,521
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30,853
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Gross profit
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36,093
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31,379
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70,695
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62,097
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Operating expenses
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Sales and marketing
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18,741
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16,677
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35,820
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32,566
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Research and development
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5,369
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5,542
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10,474
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10,611
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General and administrative
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8,139
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7,082
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15,966
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14,367
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Amortization of intangible assets
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1,117
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1,198
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2,332
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2,359
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Total operating expenses
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33,366
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30,499
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64,592
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59,903
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Income from operations
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2,727
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|
880
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6,103
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2,194
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Other income (expense)
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Interest income, net
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242
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|
151
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|
433
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|
296
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Other income (expense), net
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(102
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)
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(374
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)
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(162
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)
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(81
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)
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Total other income (expense), net
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140
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(223
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)
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271
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215
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Income before income taxes
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2,867
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|
657
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6,374
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2,409
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Income tax expense
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(1,042
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)
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(305
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)
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(1,578
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)
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(1,013
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)
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Net income
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$
|
1,825
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$
|
352
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$
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4,796
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$
|
1,396
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Net income per share
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Basic
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$
|
0.11
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$
|
0.02
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$
|
0.28
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$
|
0.08
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Diluted
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$
|
0.11
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$
|
0.02
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$
|
0.28
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$
|
0.08
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Weighted average common shares used to compute net income per share
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Basic
|
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17,198
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|
16,909
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17,176
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16,873
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Diluted
|
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17,378
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|
17,120
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|
17,384
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|
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17,100
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Other comprehensive income (loss)
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|
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|
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|
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|
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|
|
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Foreign currency translation adjustments
|
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|
935
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|
|
(856
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)
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2,512
|
|
|
|
1,965
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|
Unrealized gain on investments (net of tax of ($5), $15, ($10) and $61)
|
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|
(9
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)
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24
|
|
|
|
(17
|
)
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|
99
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|
Reclassification of gain on investments into earnings (net of tax of ($5), $0, ($15) and
$0)
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(8
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)
|
|
|
|
|
|
|
(24
|
)
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Comprehensive income (loss)
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$
|
2,743
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|
$
|
(480
|
)
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$
|
7,267
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|
|
$
|
3,460
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|
|
|
|
|
|
|
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|
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See accompanying notes to these condensed consolidated financial statements.
4
SPS COMMERCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
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Six Months Ended
|
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|
June 30,
|
|
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|
2017
|
|
|
2016
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
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|
Net income
|
|
$
|
4,796
|
|
|
$
|
1,396
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|
Reconciliation of net income to net cash provided by operating activities
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|
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Deferred income taxes
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|
1,236
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|
|
|
(439
|
)
|
Share-based earn-out liability
|
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|
|
|
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|
(72
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)
|
Depreciation and amortization of property and equipment
|
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|
3,431
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|
|
|
3,259
|
|
Amortization of intangible assets
|
|
|
2,332
|
|
|
|
2,359
|
|
Provision for doubtful accounts
|
|
|
873
|
|
|
|
592
|
|
Stock-based compensation
|
|
|
4,486
|
|
|
|
3,992
|
|
Other, net
|
|
|
9
|
|
|
|
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,607
|
)
|
|
|
(2,495
|
)
|
Deferred costs
|
|
|
(3,025
|
)
|
|
|
(2,592
|
)
|
Other current and non-current assets
|
|
|
(3
|
)
|
|
|
(3,138
|
)
|
Accounts payable
|
|
|
195
|
|
|
|
719
|
|
Accrued compensation
|
|
|
(546
|
)
|
|
|
439
|
|
Accrued expenses
|
|
|
206
|
|
|
|
464
|
|
Deferred revenue
|
|
|
5,772
|
|
|
|
4,325
|
|
Deferred rent
|
|
|
(249
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
17,906
|
|
|
|
8,792
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(3,334
|
)
|
|
|
(3,070
|
)
|
Purchases of marketable securities
|
|
|
(22,350
|
)
|
|
|
(8,499
|
)
|
Maturities of marketable securities
|
|
|
21,000
|
|
|
|
2,500
|
|
Acquisitions of businesses and intangible assets, net of cash acquired
|
|
|
(500
|
)
|
|
|
(18,062
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(5,184
|
)
|
|
|
(27,131
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Net proceeds from exercise of options to purchase common stock
|
|
|
1,244
|
|
|
|
1,749
|
|
Excess tax benefits from exercise of options to purchase common stock
|
|
|
|
|
|
|
1,421
|
|
Net proceeds from employee stock purchase plan
|
|
|
1,011
|
|
|
|
786
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,255
|
|
|
|
3,956
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes
|
|
|
890
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
15,867
|
|
|
|
(14,378
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
115,877
|
|
|
|
121,538
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
131,744
|
|
|
$
|
107,160
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these condensed consolidated financial statements.
5
SPS COMMERCE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE A General
Business Description
We are a leading provider of cloud-based supply chain management solutions, providing network-proven fulfillment, sourcing, and item assortment
management solutions, along with comprehensive retail performance analytics to thousands of customers worldwide. We provide our solutions through the SPS Commerce platform, a cloud-based product suite that improves the way suppliers, retailers,
distributors and logistics firms orchestrate the sourcing, set up of new vendors and items, and fulfillment of the products that customers buy from retailers and suppliers. We derive the majority of our revenues from thousands of monthly recurring
subscriptions from businesses that utilize our solutions.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of SPS Commerce, Inc. and its subsidiaries. All
intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all of the information and notes required by GAAP. We have included all normal
recurring adjustments considered necessary to provide a fair presentation of our financial position, results of operations and cash flows for the interim periods shown. Operating results for these interim periods are not necessarily indicative of
the results to be expected for the full year. The December 31, 2016 condensed consolidated balance sheet data was derived from our audited financial statements at that date. For further information, refer to the consolidated financial
statements and accompanying notes for the year ended December 31, 2016 included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on February 27, 2017.
Use of Estimates
Preparing financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Significant Accounting
Policies
During the six months ended June 30, 2017, there were no material changes in our significant accounting policies. See
Note A to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission on February 27, 2017, for additional information
regarding our significant accounting policies.
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-09,
Improvements to Employee Share-Based Payment
Accounting
(ASU 2016-09). The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled and provides an accounting policy election to account for
forfeitures as they occur. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows within operating activities. The standard also allows entities
to repurchase more of an employees shares for tax withholding purposes without triggering liability accounting and clarifies that all cash payments made on an employees behalf for withheld shares should be presented as a financing
activity on the statements of cash flows. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted.
We adopted ASU 2016-09 during the six months ended June 30, 2017. The impact to our consolidated balance sheet as of January 1, 2017
was a $16.3 million increase in deferred income tax assets, non-current and a corresponding $16.3 million decrease in accumulated deficit. This impact results from the cumulative-effect adjustment for previously unrecognized excess tax benefits
using the modified retrospective method required by the new standard. We elected to adopt the changes in cash flow statement presentation prospectively to be consistent with the prospective transition for the treatment of excess tax benefits in the
income statement. Accordingly, we no longer classify excess tax benefits as a financing activity subsequent to January 1, 2017.
6
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which
requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services. This guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective. These new requirements are effective for annual reporting periods beginning after December 15, 2017, and
interim periods within those annual periods. We do not believe the new revenue recognition standard will materially impact our recognition of the primary fees received from customers for our cloud-based supply chain solutions. We believe the
adoption of the new standard will impact our accounting for certain upfront set-up fees and the periods over which the related revenues are recognized, as well as the timing of cost recognition for some sales commissions. These impacts will not be
material to our financial statements. We are currently finalizing our evaluation of implementation methods and the extent of the impact that implementation of this standard will have on our financial statement disclosures upon adoption.
In February 2016, the FASB issued ASU 2016-02,
Leases
which will supersede the existing lease guidance and will require all leases with
a term greater than 12 months to be recognized in the statements of financial position and eliminate current real estate-specific lease guidance, while maintaining substantially similar classification criteria for distinguishing between finance
leases and operating leases. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We believe the adoption of the new lease accounting
standard will materially impact our consolidated financial statements by increasing our non-current assets and non-current liabilities on our consolidated balance sheets in order to record the right of use assets and related lease liabilities for
our existing operating leases. We are in the process of determining the financial statement impact and are currently unable to estimate the impact on our consolidated financial statements.
NOTE B Financial Instruments
We
invest primarily in money market funds, highly liquid debt instruments of the U.S. government, and U.S. corporate debt securities. All highly liquid investments with original maturities of 90 days or less are classified as cash equivalents. All
investments with original maturities greater than 90 days and remaining maturities less than one year from the balance sheet date are classified as short-term marketable securities. Investments with remaining maturities of more than one year from
the balance sheet date are classified as marketable securities, non-current. Short-term marketable securities and marketable securities, non-current, are also classified as available-for-sale. We intend to hold marketable securities until maturity;
however, we may sell these securities at any time for use in current operations or for other purposes. Consequently, we may or may not keep securities with stated holding periods to maturity.
Our fixed-income investments are carried at fair value and unrealized gains and losses on these investments are included in other
comprehensive income (loss) in the condensed consolidated statements of comprehensive income (loss). Realized gains or losses are included in other income (expense) in the condensed consolidated statements of comprehensive income (loss). When a
determination has been made that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is realized and is included in other income (expense), net in the condensed consolidated
statements of comprehensive income (loss).
7
Cash equivalents and marketable securities, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains (Losses)
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
80,158
|
|
|
$
|
|
|
|
$
|
80,158
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
14,677
|
|
|
|
(134
|
)
|
|
|
14,543
|
|
Commercial paper
|
|
|
4,975
|
|
|
|
|
|
|
|
4,975
|
|
U.S. treasury securities
|
|
|
12,380
|
|
|
|
(5
|
)
|
|
|
12,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
112,190
|
|
|
$
|
(139
|
)
|
|
$
|
112,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
$
|
107,054
|
|
Due within two years
|
|
|
|
4,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
112,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains (Losses)
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
75,375
|
|
|
$
|
|
|
|
$
|
75,375
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
15,681
|
|
|
|
(96
|
)
|
|
|
15,585
|
|
Commercial paper
|
|
|
4,977
|
|
|
|
10
|
|
|
|
4,987
|
|
U.S. treasury securities
|
|
|
7,489
|
|
|
|
10
|
|
|
|
7,499
|
|
U.S. agency obligations
|
|
|
2,497
|
|
|
|
3
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
106,019
|
|
|
$
|
(73
|
)
|
|
$
|
105,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
$
|
98,452
|
|
Due within two years
|
|
|
|
7,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
105,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We do not believe any of the unrealized losses represent an other-than-temporary impairment based on our
valuation of available evidence as of June 30, 2017. We expect to receive the full principal and interest on all of these cash equivalents and marketable securities.
Fair Value Measurements
We
measure certain financial assets at fair value on a recurring basis based on a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial
instruments categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that may be used to measure fair value are:
|
|
|
Level 1 quoted prices in active markets for identical assets or liabilities
|
|
|
|
Level 2 observable inputs other than Level 1 prices, such as: (a) quoted prices for similar assets or liabilities, (b) quoted prices in markets with insufficient volume or infrequent transactions (less
active markets), or (c) model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
|
Level 3 unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
|
Level 1 Measurements
Our cash
equivalents held in money market funds are measured at fair value using level 1 inputs.
8
Level 2 Measurements
Our available-for-sale U.S. treasury securities, U.S. agency obligations, commercial paper and corporate debt securities are measured at fair
value using level 2 inputs. We obtain the fair values of our level 2 available-for-sale securities from a professional pricing service.
The following table presents information about our financial assets that are measured at fair value on a recurring basis and indicates the
fair value hierarchy of the valuation techniques utilized to determine such fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
80,158
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
80,158
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
|
|
|
|
14,543
|
|
|
|
|
|
|
|
14,543
|
|
Commercial paper
|
|
|
|
|
|
|
4,975
|
|
|
|
|
|
|
|
4,975
|
|
U.S. treasury securities
|
|
|
|
|
|
|
12,375
|
|
|
|
|
|
|
|
12,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
80,158
|
|
|
$
|
31,893
|
|
|
$
|
|
|
|
$
|
112,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
75,375
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
75,375
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
|
|
|
|
15,585
|
|
|
|
|
|
|
|
15,585
|
|
Commercial paper
|
|
|
|
|
|
|
4,987
|
|
|
|
|
|
|
|
4,987
|
|
U.S. treasury securities
|
|
|
|
|
|
|
7,499
|
|
|
|
|
|
|
|
7,499
|
|
U.S. agency obligations
|
|
|
|
|
|
|
2,500
|
|
|
|
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
75,375
|
|
|
$
|
30,571
|
|
|
$
|
|
|
|
$
|
105,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We classify our cash and cash equivalents and marketable securities within Level 1 or Level 2 because we use
quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value.
9
NOTE C Goodwill and Intangible Assets, net
Changes in the carrying amount of goodwill for the six months ended June 30, 2017 are as follows:
|
|
|
|
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Balances, January 1
|
|
$
|
49,777
|
|
Goodwill acquired during the period
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
989
|
|
|
|
|
|
|
Balances, June 30
|
|
$
|
50,766
|
|
|
|
|
|
|
Intangible assets subject to amortization primarily include subscriber relationships, non-competition
agreements and acquired technology and are amortized over their respective useful lives (ranging from 1 to 9 years). Information regarding intangible assets included on our consolidated balance sheets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Foreign
Currency
Translation
|
|
|
Net
|
|
|
|
(Dollars in thousands)
|
|
Subscriber relationships
|
|
$
|
34,350
|
|
|
$
|
(17,606
|
)
|
|
$
|
366
|
|
|
$
|
17,110
|
|
Non-competition agreements
|
|
|
2,499
|
|
|
|
(1,965
|
)
|
|
|
29
|
|
|
|
563
|
|
Technology and other
|
|
|
2,130
|
|
|
|
(1,352
|
)
|
|
|
33
|
|
|
|
811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,979
|
|
|
$
|
(20,923
|
)
|
|
$
|
428
|
|
|
$
|
18,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Foreign
Currency
Translation
|
|
|
Net
|
|
|
|
(Dollars in thousands)
|
|
Subscriber relationships
|
|
$
|
33,736
|
|
|
$
|
(15,708
|
)
|
|
$
|
295
|
|
|
$
|
18,323
|
|
Non-competition agreements
|
|
|
2,234
|
|
|
|
(1,818
|
)
|
|
|
17
|
|
|
|
433
|
|
Technology and other
|
|
|
2,089
|
|
|
|
(1,120
|
)
|
|
|
63
|
|
|
|
1,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,059
|
|
|
$
|
(18,646
|
)
|
|
$
|
375
|
|
|
$
|
19,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense for intangible assets during the three months ended June 30, 2017 and 2016 was
$1.1 million and $1.2 million, respectively. Total amortization expense for intangible assets during the six months ended June 30, 2017 and 2016 was $2.3 million and $2.4 million, respectively. The estimated annual
amortization expense related to intangible assets subject to amortization for the next five years is as follows:
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Remainder of 2017
|
|
$
|
2,221
|
|
2018
|
|
|
3,968
|
|
2019
|
|
|
3,676
|
|
2020
|
|
|
3,321
|
|
2021
|
|
|
2,481
|
|
Thereafter
|
|
|
2,817
|
|
|
|
|
|
|
|
|
$
|
18,484
|
|
|
|
|
|
|
10
NOTE D Commitments and Contingencies
Operating Leases
At June 30, 2017,
our future minimum payments under operating leases were as follows:
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Remainder of 2017
|
|
$
|
1,688
|
|
2018
|
|
|
3,353
|
|
2019
|
|
|
3,443
|
|
2020
|
|
|
1,893
|
|
2021
|
|
|
1,040
|
|
Thereafter
|
|
|
1,174
|
|
|
|
|
|
|
|
|
$
|
12,591
|
|
|
|
|
|
|
NOTE E Stock-Based Compensation
Our equity compensation plans provide for the grant of incentive and nonqualified stock options, as well as other stock-based awards including
restricted stock and restricted stock units, to employees, non-employee directors and other consultants who provide services to us. Restricted stock awards result in the issuance of new shares when granted. For other stock-based awards, new shares
are issued when the award is exercised, vested or released according to the terms of the agreement. In February 2017, 1,024,868 additional shares were reserved for future issuance under our 2010 Equity Incentive Plan. At June 30, 2017, there
were approximately 4.5 million shares available for grant under approved equity compensation plans.
We recorded stock-based
compensation expense of $2.2 million and $4.5 million for the three and six months ended June 30, 2017 and $2.1 million and $4.0 million for the three and six months ended June 30, 2016, respectively. This expense was allocated in the
consolidated statements of comprehensive income (loss) as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Cost of revenues
|
|
$
|
469
|
|
|
$
|
317
|
|
|
$
|
920
|
|
|
$
|
597
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
574
|
|
|
|
639
|
|
|
|
1,091
|
|
|
|
1,293
|
|
Research and development
|
|
|
228
|
|
|
|
141
|
|
|
|
457
|
|
|
|
279
|
|
General and administrative
|
|
|
915
|
|
|
|
968
|
|
|
|
2,018
|
|
|
|
1,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
2,186
|
|
|
$
|
2,065
|
|
|
$
|
4,486
|
|
|
$
|
3,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017, there was approximately $22.0 million of unrecognized stock-based compensation
expense under our equity compensation plans, which is expected to be recognized on a straight-line basis over a weighted average period of 2.8 years.
11
Stock Options
Stock options generally vest over four years and have a contractual term of seven to ten years from the date of grant. Our stock option
activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted Average
Exercise Price
|
|
|
|
(#)
|
|
|
($/share)
|
|
Outstanding at December 31, 2016
|
|
|
1,016,012
|
|
|
$
|
44.72
|
|
Granted
|
|
|
167,903
|
|
|
|
56.00
|
|
Exercised
|
|
|
(60,592
|
)
|
|
|
20.52
|
|
Forfeited
|
|
|
(8,417
|
)
|
|
|
56.28
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
1,114,906
|
|
|
|
47.65
|
|
|
|
|
|
|
|
|
|
|
Of the total outstanding options at June 30, 2017, 671,876 were exercisable with a weighted average
exercise price of $43.11 per share. The total outstanding options had a weighted average remaining contractual life of 4.53 years.
The
weighted average grant date fair value of options granted during the first six months of 2017 was $18.90 and this was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
|
|
|
|
|
Volatility
|
|
|
37.4
|
%
|
Dividend yield
|
|
|
0
|
%
|
Life (in years)
|
|
|
4.5
|
|
Risk-free interest rate
|
|
|
1.85
|
%
|
Performance Share Units and Restricted Stock Units and Awards
In February 2017, our executive officers were granted performance share unit (PSU) awards with vesting contingent on successful
attainment of pre-determined revenue targets over the course of a three-year performance period (fiscal years 2017 2019). During the three months ended March 31, 2017, we recognized expense of $169,000 for PSU awards; and during the
three months ended June 30, 2017 we recognized a reversing benefit of $169,000 as the probability of attainment was decreased.
Restricted stock units vest over four years and, upon vesting, the holder is entitled to receive shares of our common stock. With restricted
stock awards, shares of our common stock are issued when the award is granted and the restrictions lapse over one year.
Activity for our
performance share units and restricted stock units was as follows:
|
|
|
|
|
|
|
|
|
|
|
Performance Share and
Restricted Stock Units
|
|
|
Weighted Average
Grant Date Fair Value
|
|
|
|
(#)
|
|
|
($/share)
|
|
Outstanding at December 31, 2016
|
|
|
189,042
|
|
|
$
|
54.14
|
|
Granted
|
|
|
206,043
|
|
|
|
55.72
|
|
Vested and common stock issued
|
|
|
(64,818
|
)
|
|
|
53.63
|
|
Forfeited
|
|
|
(3,317
|
)
|
|
|
54.67
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
326,950
|
|
|
|
55.23
|
|
|
|
|
|
|
|
|
|
|
The number of restricted stock units outstanding at June 30, 2017 included 18,448 units that have vested,
but for which shares of common stock have not yet been issued pursuant to the terms of the agreement.
12
Our restricted stock awards activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
Awards
|
|
|
Weighted Average
Grant Date Fair Value
|
|
|
|
(#)
|
|
|
($/share)
|
|
Outstanding at December 31, 2016
|
|
|
1,524
|
|
|
$
|
52.28
|
|
Restricted common stock issued
|
|
|
5,454
|
|
|
|
58.29
|
|
Restrictions lapsed
|
|
|
(2,886
|
)
|
|
|
55.11
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
4,092
|
|
|
|
58.29
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan
Our employee stock purchase plan allows participating employees to purchase shares of our common stock at a discount through payroll
deductions. The plan is available to all employees subject to certain eligibility requirements. Participating employees may purchase common stock, on a voluntary after tax basis, at a price that is the lower of 85% of the fair market value of one
share of common stock at the beginning or end of each stock purchase period. The plan consists of two six-month offering periods, beginning on January 1 and July 1 of each calendar year, respectively. A total of 1.0 million shares of
common stock are reserved for issuance under the plan.
For the offering period that began on January 1, 2017 and ended on
June 30, 2017, we withheld approximately $1,021,000 from employees participating in the plan. On June 30, 2017, approximately $1,011,000 of these funds were used to purchase 18,655 shares on behalf of the employees participating in the
plan. The remaining funds are expected to be refunded to employees pursuant to the requirements of the plan.
For the three and six months
ended June 30, 2017, we recorded approximately $154,000 and $292,000, respectively, of stock-based compensation expense associated with the employee stock purchase plan. The fair value was estimated based on the market price of our common stock
at the beginning of the offering period using the Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
Volatility
|
|
|
26.0
|
%
|
Dividend yield
|
|
|
0
|
%
|
Life (in years)
|
|
|
0.5
|
|
Risk-free interest rate
|
|
|
0.62
|
%
|
NOTE F Income Taxes
We record our interim provision for income taxes by applying our estimated annual effective tax rate to our year-to-date pretax income and
adjust the provision for discrete tax items recorded in the period. Differences between our effective tax rate and statutory tax rates are primarily due to the impact of permanently non-deductible expenses partially offset by the federal research
and development credit. Additionally, excess tax benefits generated upon settlement or exercise of stock awards are now recognized as a reduction to income tax expense as a discrete tax item in the quarter that the event occurs creating potentially
significant fluctuation in tax expense by quarter and by year. Our provisions for income taxes include current foreign and state income tax expense, as well as deferred tax expense.
As of June 30, 2017 we do not have any unrecognized tax benefits nor any accrued interest or tax penalties.
NOTE G Net Income Per Share
Basic
net income per share has been computed using the weighted average number of shares of common stock outstanding during each period. Diluted net income per share also includes the impact of our outstanding potential common shares, including options
and restricted stock units. Potential common shares that are anti-dilutive are excluded from the calculation of diluted net income per share.
13
The following table presents the components of the computation of basic and diluted net income
per share for the periods indicated (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
1,825
|
|
|
$
|
352
|
|
|
$
|
4,796
|
|
|
$
|
1,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
|
$
|
0.02
|
|
|
$
|
0.28
|
|
|
$
|
0.08
|
|
Diluted
|
|
$
|
0.11
|
|
|
$
|
0.02
|
|
|
$
|
0.28
|
|
|
$
|
0.08
|
|
Weighted average common shares outstanding, basic
|
|
|
17,198
|
|
|
|
16,909
|
|
|
|
17,176
|
|
|
|
16,873
|
|
Options to purchase common stock
|
|
|
152
|
|
|
|
209
|
|
|
|
177
|
|
|
|
226
|
|
Restricted stock units
|
|
|
28
|
|
|
|
2
|
|
|
|
31
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, diluted
|
|
|
17,378
|
|
|
|
17,120
|
|
|
|
17,384
|
|
|
|
17,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive shares
|
|
|
267,000
|
|
|
|
315,000
|
|
|
|
267,000
|
|
|
|
339,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a leading
provider of cloud-based supply chain management solutions, providing network-proven fulfillment, sourcing, and item assortment management solutions, along with comprehensive retail performance analytics to thousands of customers worldwide. We
provide our solutions through the SPS Commerce platform, a cloud-based product suite that improves the way suppliers, retailers, distributors and logistics firms orchestrate the sourcing, set up of new vendors and items, and fulfillment of the
products that customers buy from retailers and suppliers. We derive the majority of our revenues from thousands of monthly recurring subscriptions from businesses that utilize our solutions.
We plan to continue to grow our business by further penetrating the supply chain management market, increasing revenues from our customers as
their businesses grow, expanding our distribution channels, expanding our international presence and, from time to time, developing new solutions and applications. We also intend to selectively pursue acquisitions that will add customers, allow us
to expand into new regions or allow us to offer new functionalities.
For the three months ended June 30, 2017, our revenues were $54.3 million, an
increase of 15% from the comparable period in 2016, and represented our 66
th
consecutive quarter of increased revenues. Total operating expenses increased 9% for the same period in 2017 from 2016.
We experienced similar results for the six months ended June 30, 2017 with revenues increasing 14% and operating expenses increasing 8% compared to the same period in 2016.
Key Financial Terms and Metrics
We have several key
financial terms and metrics, including annualized average recurring revenues per recurring revenue customer, which we also refer to as wallet share. During the six months ended June 30, 2017, there were no changes in the definitions of our key
financial terms and metrics, which are discussed in more detail under the heading
Managements Discussion and Analysis of Financial Condition and Results of Operations
included in our Annual Report on Form 10-K for the year
ended December 31, 2016 as filed with the Securities and Exchange Commission on February 27, 2017.
To supplement our financial
statements, we also provide investors with Adjusted EBITDA and non-GAAP income per share, both of which are non-GAAP financial measures. We believe that these non-GAAP measures provide useful information to management and investors regarding certain
financial and business trends relating to our financial condition and results of operations. Our management uses these non-GAAP measures to compare the companys performance to that of prior periods for trend analyses and planning purposes.
Adjusted EBITDA is also used for purposes of determining executive and senior management incentive compensation. These measures are presented to our board of directors.
These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with U.S.
generally accepted accounting principles (GAAP). These non-GAAP financial measures exclude significant expenses and income that are required by GAAP to be recorded in our financial statements and are subject to inherent limitations.
Investors should review the reconciliations of non-GAAP financial measures to the comparable GAAP financial measures that are included in this
Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Critical Accounting Policies and Estimates
This discussion of our financial condition and results of operations is based upon our condensed consolidated financial statements, which are
prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures.
On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable. Our actual
results may differ from these estimates under different assumptions or conditions.
A critical accounting policy is one that is both
material to the presentation of our financial statements and requires us to make difficult, subjective or complex judgments relating to uncertain matters that could have a material effect on our financial condition and results of operations.
Accordingly, we believe that our policies for revenue recognition, income taxes, stock-based compensation and the valuation of goodwill and purchased intangible assets are the most critical to fully understand and evaluate our financial condition
and results of operations.
15
During the six months ended June 30, 2017, there were no changes in our significant
accounting policies or estimates. See Note A to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the
Securities and Exchange Commission on February 27, 2017, for additional information regarding our accounting policies.
Results of Operations
Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
The following table presents our results of operations for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
|
|
|
|
% of
revenue
|
|
|
|
|
|
% of
revenue
|
|
|
$
|
|
|
%
|
|
Revenues
|
|
$
|
54,284
|
|
|
|
100.0
|
%
|
|
$
|
47,351
|
|
|
|
100.0
|
%
|
|
|
6,933
|
|
|
|
14.6
|
|
Cost of revenues
|
|
|
18,191
|
|
|
|
33.5
|
|
|
|
15,972
|
|
|
|
33.7
|
|
|
|
2,219
|
|
|
|
13.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
36,093
|
|
|
|
66.5
|
|
|
|
31,379
|
|
|
|
66.3
|
|
|
|
4,714
|
|
|
|
15.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
18,741
|
|
|
|
34.5
|
|
|
|
16,677
|
|
|
|
35.2
|
|
|
|
2,064
|
|
|
|
12.4
|
|
Research and development
|
|
|
5,369
|
|
|
|
9.9
|
|
|
|
5,542
|
|
|
|
11.7
|
|
|
|
(173
|
)
|
|
|
(3.1
|
)
|
General and administrative
|
|
|
8,139
|
|
|
|
15.0
|
|
|
|
7,082
|
|
|
|
15.0
|
|
|
|
1,057
|
|
|
|
14.9
|
|
Amortization of intangible assets
|
|
|
1,117
|
|
|
|
2.1
|
|
|
|
1,198
|
|
|
|
2.5
|
|
|
|
(81
|
)
|
|
|
(6.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
33,366
|
|
|
|
61.5
|
|
|
|
30,499
|
|
|
|
64.4
|
|
|
|
2,867
|
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
2,727
|
|
|
|
5.0
|
|
|
|
880
|
|
|
|
1.9
|
|
|
|
1,847
|
|
|
|
209.9
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
242
|
|
|
|
0.4
|
|
|
|
151
|
|
|
|
0.3
|
|
|
|
91
|
|
|
|
60.3
|
|
Other expense, net
|
|
|
(102
|
)
|
|
|
(0.2
|
)
|
|
|
(374
|
)
|
|
|
(0.8
|
)
|
|
|
(272
|
)
|
|
|
(72.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
140
|
|
|
|
0.3
|
|
|
|
(223
|
)
|
|
|
(0.5
|
)
|
|
|
(363
|
)
|
|
|
(162.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
2,867
|
|
|
|
5.3
|
|
|
|
657
|
|
|
|
1.4
|
|
|
|
2,210
|
|
|
|
336.4
|
|
Income tax expense
|
|
|
(1,042
|
)
|
|
|
(1.9
|
)
|
|
|
(305
|
)
|
|
|
(0.6
|
)
|
|
|
737
|
|
|
|
241.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,825
|
|
|
|
3.4
|
|
|
$
|
352
|
|
|
|
0.7
|
|
|
|
1,473
|
|
|
|
418.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to rounding, totals may not equal the sum of the line items in the table above.
Revenues.
Revenues for the three months ended June 30, 2017 increased $6.9 million, or 15%, to $54.3 million from
$47.4 million for the same period in 2016. The increase in revenues resulted from two primary factors: the increase in recurring revenue customers and the increase in annualized average recurring revenues per recurring revenue customer, which
we also refer to as wallet share.
|
|
|
The number of recurring revenue customers increased 4% to 25,153 at June 30, 2017 from 24,186 at June 30, 2016.
|
|
|
|
Annualized average recurring revenues per recurring revenue customer, or wallet share, increased 11% to $7,993 for the three months ended June 30, 2017 from $7,223 for the same period in 2017. This increase in
wallet share was primarily attributable to increased usage of our solutions by our recurring revenue customers and growth in larger customers.
|
Recurring revenues from recurring revenue customers accounted for 92% of our total revenues for each of the three months ended June 30,
2017 and 2016. We anticipate that the number of recurring revenue customers and wallet share will continue to increase as we increase the number of solutions we offer and increase the penetration of those solutions across our customer base.
Cost of Revenues.
Cost of revenues for the three months ended June 30, 2017 increased $2.2 million, or 14%, to $18.2 million from
$16.0 million for the same period in 2016. The increase in cost of revenues for the three-month period in 2017 was primarily due to an increase in personnel-related costs of approximately $1.5 million, driven by increased headcount and an
increase of $886,000 in consulting costs. Compared to the same period in 2016, stock-based compensation expense increased by $151,000.
16
Additionally, as we continued to invest in the infrastructure supporting our platform, costs for software and cloud-based subscriptions increased by $550,000 and depreciation expense increased by
$164,000, while direct network costs decreased by $113,000 compared to the same period in 2016. As a percentage of revenues, cost of revenues were 34% for each of the three months ended June 30, 2017 and 2016. Going forward, we anticipate that
cost of revenues will increase in absolute dollars as we continue to expand our business.
Sales and Marketing Expenses.
Sales and
marketing expenses for the three months ended June 30, 2017 increased $2.0 million, or 12%, to $18.7 million from $16.7 million for the same period in 2016. The increase in sales and marketing expenses for the three-month period in
2017 was due to increased headcount, which resulted in an increase of $402,000 in personnel-related costs, as well as an increase of $1.5 million in variable compensation earned by sales personnel and referral partners from new business, compared to
the same period in 2016. We also incurred higher promotional costs of approximately $288,000, partially offset by a decrease in depreciation expense of $95,000. As a percentage of revenues, sales and marketing expenses were 35% for each of the three
months ended June 30, 2017 and 2016. As we expand our business, we will continue to add resources to our sales and marketing efforts over time, and we expect that these expenses will continue to increase in absolute dollars.
Research and Development Expenses.
Research and development expenses for the three months ended June 30, 2017 decreased $173,000,
or 3%, to $5.4 million from $5.5 million for the same period in 2016. During the three months ended June 30, 2017, personnel costs increased by $156,000 and stock-based compensation increased by $87,000 compared to the same period in 2016.
These increased costs were offset by an increase of $431,000 in the amount of internal labor capitalized for internal-use software development, which reduced the current period expense by that amount. As a percentage of revenues, research and
development expenses were 10% and 12% for the three months ended June 30, 2017 and 2016, respectively. As we enhance and expand our solutions and applications, we expect that research and development expenses will continue to increase in
absolute dollars.
General and Administrative Expenses.
General and administrative expenses for the three months ended
June 30, 2017 increased $1.0 million, or 14%, to $8.1 million from $7.1 million for the same period in 2016. The increase in general and administrative expenses for the three-month period in 2017 was primarily due to headcount growth, which
resulted in an increase of $740,000 in personnel-related costs compared to the same period in 2016. Additionally, bad debt expense increased by $253,000 and costs of software subscriptions increased by $193,000, while legal, audit and tax fees
decreased by $132,000 compared to the same period in 2016. As a percentage of revenues, general and administrative expenses were 15% for each of the three months ended June 30, 2017 and 2016. Going forward, we expect that general and
administrative expenses will continue to increase in absolute dollars as we expand our business.
Other Income (Expense), net.
Other income (expense), net for the three months ended June 30, 2016 included $293,000 of expense for an adjustment to the fair value of the Toolbox Solutions share-based earn-out liability due to the change in the stock price during the six
months ended June 30, 2016. There was no similar charge during the three months ended June 30, 2017 as the contingent consideration arrangement had been resolved.
Income Tax Expense.
We recorded income tax expense of $1.0 million for the three months ended June 30, 2017 compared to income tax
expense of $305,000 for three months ended June 30, 2016. The increase in income tax expense for the three-month period in 2017 was primarily due to increased pretax book income, offset by discrete tax benefits from the adoption of ASU 2016-09
relating to stock-based compensation. Under ASU 2016-09, excess tax benefits generated upon the settlement or exercise of stock awards are no longer recognized as additional paid-in capital but are instead recognized as a reduction to income tax
expense. As a result of recording these excess tax benefits in income tax expense, we expect that our annual effective income tax rate will be more volatile than it has been historically.
17
Adjusted EBITDA.
Adjusted EBITDA, which is a non-GAAP measure of financial performance,
consists of net income adjusted for depreciation and amortization, interest expense, interest income, income tax expense, stock-based compensation expense and other adjustments as necessary for a fair presentation. Other adjustments included the
impact of the fair value adjustment for the Toolbox Solutions share-based earn-out liability. The following table provides a reconciliation of net income to Adjusted EBITDA (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
1,825
|
|
|
$
|
352
|
|
Depreciation and amortization of property and equipment
|
|
|
1,740
|
|
|
|
1,633
|
|
Amortization of intangible assets
|
|
|
1,117
|
|
|
|
1,198
|
|
Interest income, net
|
|
|
(242
|
)
|
|
|
(151
|
)
|
Income tax expense
|
|
|
1,042
|
|
|
|
305
|
|
Stock-based compensation expense
|
|
|
2,186
|
|
|
|
2,065
|
|
Other
|
|
|
|
|
|
|
293
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
7,668
|
|
|
$
|
5,695
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Income per Share.
Non-GAAP income per share, which is also a non-GAAP measure of financial
performance, consists of net income plus stock-based compensation expense, amortization expense related to intangible assets and other adjustments necessary for a fair presentation divided by the weighted average number of shares of common stock
outstanding during each period. Other adjustments included the impact of the fair value adjustment for the Toolbox Solutions share-based earn-out liability. The following table provides a reconciliation of net income to non-GAAP income per share (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
1,825
|
|
|
$
|
352
|
|
Stock-based compensation expense
|
|
|
2,186
|
|
|
|
2,065
|
|
Amortization of intangible assets
|
|
|
1,117
|
|
|
|
1,198
|
|
Other
|
|
|
|
|
|
|
293
|
|
Income tax effects of adjustments
|
|
|
(1,211
|
)
|
|
|
(1,272
|
)
|
|
|
|
|
|
|
|
|
|
Non-GAAP income
|
|
$
|
3,917
|
|
|
$
|
2,636
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute non-GAAP income per share
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,198
|
|
|
|
16,909
|
|
Diluted
|
|
|
17,378
|
|
|
|
17,120
|
|
Non-GAAP income per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.23
|
|
|
$
|
0.16
|
|
Diluted
|
|
$
|
0.23
|
|
|
$
|
0.15
|
|
18
Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
The following table presents our results of operations for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
|
|
|
|
% of
revenue
|
|
|
|
|
|
% of
revenue
|
|
|
$
|
|
|
%
|
|
Revenues
|
|
$
|
106,216
|
|
|
|
100.0
|
%
|
|
$
|
92,950
|
|
|
|
100.0
|
%
|
|
|
13,266
|
|
|
|
14.3
|
|
Cost of revenues
|
|
|
35,521
|
|
|
|
33.4
|
|
|
|
30,853
|
|
|
|
33.2
|
|
|
|
4,668
|
|
|
|
15.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
70,695
|
|
|
|
66.6
|
|
|
|
62,097
|
|
|
|
66.8
|
|
|
|
8,598
|
|
|
|
13.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
35,820
|
|
|
|
33.7
|
|
|
|
32,566
|
|
|
|
35.0
|
|
|
|
3,254
|
|
|
|
10.0
|
|
Research and development
|
|
|
10,474
|
|
|
|
9.9
|
|
|
|
10,611
|
|
|
|
11.4
|
|
|
|
(137
|
)
|
|
|
(1.3
|
)
|
General and administrative
|
|
|
15,966
|
|
|
|
15.0
|
|
|
|
14,367
|
|
|
|
15.5
|
|
|
|
1,599
|
|
|
|
11.1
|
|
Amortization of intangible assets
|
|
|
2,332
|
|
|
|
2.2
|
|
|
|
2,359
|
|
|
|
2.5
|
|
|
|
(27
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
64,592
|
|
|
|
60.8
|
|
|
|
59,903
|
|
|
|
64.4
|
|
|
|
4,689
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6,103
|
|
|
|
5.7
|
|
|
|
2,194
|
|
|
|
2.4
|
|
|
|
3,909
|
|
|
|
178.2
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
433
|
|
|
|
0.4
|
|
|
|
296
|
|
|
|
0.3
|
|
|
|
137
|
|
|
|
46.3
|
|
Other expense, net
|
|
|
(162
|
)
|
|
|
(0.2
|
)
|
|
|
(81
|
)
|
|
|
(0.1
|
)
|
|
|
(81
|
)
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
271
|
|
|
|
0.3
|
|
|
|
215
|
|
|
|
0.2
|
|
|
|
56
|
|
|
|
26.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
6,374
|
|
|
|
6.0
|
|
|
|
2,409
|
|
|
|
2.6
|
|
|
|
3,965
|
|
|
|
164.6
|
|
Income tax expense
|
|
|
(1,578
|
)
|
|
|
(1.5
|
)
|
|
|
(1,013
|
)
|
|
|
(1.1
|
)
|
|
|
(565
|
)
|
|
|
55.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,796
|
|
|
|
4.5
|
|
|
$
|
1,396
|
|
|
|
1.5
|
|
|
|
3,400
|
|
|
|
243.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to rounding, totals may not equal the sum of the line items in the table above.
Revenues.
Revenues for the six months ended June 30, 2017 increased $13.3 million, or 14%, to $106.2 million from
$93.0 million for the same period in 2016. The increase in revenues resulted from two primary factors: the increase in recurring revenue customers and the increase in annualized average recurring revenues per recurring revenue customer, which
we also refer to as wallet share.
|
|
|
The number of recurring revenue customers increased 4% to 25,153 at June 30, 2017 from 24,186 at June 30, 2016.
|
|
|
|
Annualized average recurring revenues per recurring revenue customer, or wallet share, increased 10% to $7,852 for the six months ended June 30, 2017 from $7,139 for the same period in 2016. This increase in wallet
share was primarily attributable to increased fees resulting from increased usage of our solutions by our recurring revenue customers and growth in larger customers.
|
Recurring revenues from recurring revenue customers accounted for 92% of our total revenues for the six months ended June 30, 2017 and
2016. We anticipate that the number of recurring revenue customers and wallet share will continue to increase as we increase the number of solutions we offer and increase the penetration of those solutions across our customer base.
Cost of Revenues.
Cost of revenues for the six months ended June 30, 2017 increased $4.7 million, or 15%, to $35.5 million from
$30.9 million for the same period in 2016. The increase in cost of revenues for the six-month period in 2017 was primarily due to an increase in personnel-related costs of approximately $3.3 million, driven by increased headcount and an increase of
$1.5 million in consulting costs. Compared to the same period in 2016, stock-based compensation expense increased by $323,000 and occupancy costs increased by $78,000. Additionally, as we continued to invest in the infrastructure supporting our
platform, costs for software and cloud-based subscriptions increased by $943,000 and depreciation expense increased by $286,000, while direct network costs decreased by $212,000 compared to the same period in 2016. As a percentage of revenues, cost
of revenues were 33% for each of the six months ended June 30, 2017 and 2016. Going forward, we anticipate that cost of revenues will increase in absolute dollars as we continue to expand our business.
19
Sales and Marketing Expenses.
Sales and marketing expenses for the six months ended
June 30, 2017 increased $3.3 million, or 10%, to $35.8 million from $32.6 million for the same period in 2016. The increase in sales and marketing expenses for the six-month period in 2017 was primarily due to increased headcount,
which resulted in an increase of $1.1 million in personnel-related costs, as well as an increase of $2.0 million in variable compensation earned by sales personnel and referral partners from new business compared to the same period in 2016. We also
incurred higher promotional costs of approximately $455,000, partially offset by a decrease in depreciation expense of $209,000 and a decrease in stock-based compensation of $202,000. As a percentage of revenues, sales and marketing expenses were
34% and 35% for the six months ended June 30, 2017 and 2016, respectively. As we expand our business, we will continue to add resources to our sales and marketing efforts over time, and we expect that these expenses will continue to increase in
absolute dollars.
Research and Development Expenses.
Research and development expenses for the six months ended June 30, 2017
decreased $137,000, or 1%, to $10.5 million from $10.6 million for the same period in 2016. During the six months ended June 30, 2017, personnel costs increased by $255,000 and stock-based compensation increased by $178,000 compared to the same
period in 2016. These increased costs were offset by an increase of $811,000 in the amount of internal labor capitalized for internal-use software development, which reduced the current period expense by that amount. Additionally, occupancy costs
increased by $133,000 and costs of software and cloud-based subscriptions increased by $204,000 during the six months ended June 30, 2017 compared to the same period in 2016. As a percentage of revenues, research and development expenses were
10% and 11% for the six months ended June 30, 2017 and 2016, respectively. As we enhance and expand our solutions and applications, we expect that research and development expenses will continue to increase in absolute dollars.
General and Administrative Expenses.
General and administrative expenses for the six months ended June 30, 2017 increased $1.6
million, or 11%, to $16.0 million from $14.4 million for the same period in 2016. The increase in general and administrative expenses for the six-month period in 2017 was primarily due to headcount growth, which resulted in an increase of $1.0
million in personnel-related costs and an increase of $195,000 in stock-based compensation compared to the same period in 2016. Additionally, costs of software and cloud-based subscriptions increased by $483,000, bad debt expense increased by
$281,000 and credit card fees increased by $126,000, while legal, audit and tax fees decreased by $281,000 and hardware costs decreased by $207,000 compared to the same period in 2016. As a percentage of revenues, general and administrative expenses
were 15% and 16% for the six months ended June 30, 2017 and 2016, respectively. Going forward, we expect that general and administrative expenses will continue to increase in absolute dollars as we expand our business.
Other Income (Expense), net.
Other income (expense), net for the six months ended June 30, 2016 included $72,000 of expense for an
adjustment to the fair value of the Toolbox Solutions share-based earn-out liability due to the change in the stock price between December 31, 2015 and June 30, 2016. There was no similar charge during the six months ended June 30,
2017 as the contingent consideration arrangement had been resolved.
Income Tax Expense.
We recorded income tax expense of $1.6
million for the six months ended June 30, 2017 compared to income tax expense of $1.0 million for six months ended June 30, 2016. The increase in income tax expense for the six-month period in 2017 was primarily due to increased pretax
book income, offset by discrete tax benefits from the adoption of ASU 2016-09 relating to stock-based compensation. Under ASU 2016-09, excess tax benefits generated upon the settlement or exercise of stock awards are no longer recognized as
additional paid-in capital but are instead recognized as a reduction to income tax expense. As a result of recording these excess tax benefits in income tax expense, we expect that our annual effective income tax rate will be more volatile than it
has been historically.
20
Adjusted EBITDA.
Adjusted EBITDA, which is a non-GAAP measure of financial performance,
consists of net income adjusted for depreciation and amortization, interest expense, interest income, income tax expense, stock-based compensation expense and other adjustments as necessary for a fair presentation. Other adjustments included the
impact of the fair value adjustment for the Toolbox Solutions share-based earn-out liability. The following table provides a reconciliation of net income to Adjusted EBITDA (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
4,796
|
|
|
$
|
1,396
|
|
Depreciation and amortization of property and equipment
|
|
|
3,431
|
|
|
|
3,259
|
|
Amortization of intangible assets
|
|
|
2,332
|
|
|
|
2,359
|
|
Interest income, net
|
|
|
(433
|
)
|
|
|
(296
|
)
|
Income tax expense
|
|
|
1,578
|
|
|
|
1,013
|
|
Stock-based compensation expense
|
|
|
4,486
|
|
|
|
3,992
|
|
Other
|
|
|
|
|
|
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
16,190
|
|
|
$
|
11,651
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Income per Share.
Non-GAAP income per share, which is also a non-GAAP measure of financial
performance, consists of net income plus stock-based compensation expense, amortization expense related to intangible assets and other adjustments necessary for a fair presentation divided by the weighted average number of shares of common stock
outstanding during each period. Other adjustments included the impact of the fair value adjustment for the Toolbox Solutions share-based earn-out liability. The following table provides a reconciliation of net income to non-GAAP income per share (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
4,796
|
|
|
$
|
1,396
|
|
Stock-based compensation expense
|
|
|
4,486
|
|
|
|
3,992
|
|
Amortization of intangible assets
|
|
|
2,332
|
|
|
|
2,359
|
|
Other
|
|
|
|
|
|
|
(72
|
)
|
Income tax effects of adjustments
|
|
|
(3,344
|
)
|
|
|
(2,338
|
)
|
|
|
|
|
|
|
|
|
|
Non-GAAP income
|
|
$
|
8,270
|
|
|
$
|
5,337
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute non-GAAP income per share
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,176
|
|
|
|
16,873
|
|
Diluted
|
|
|
17,384
|
|
|
|
17,100
|
|
Non-GAAP income per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.48
|
|
|
$
|
0.32
|
|
Diluted
|
|
$
|
0.48
|
|
|
$
|
0.31
|
|
Liquidity and Capital Resources
At June 30, 2017, our principal sources of liquidity were cash, cash equivalents and marketable securities of $163.6 million and
accounts receivable, net of allowance for doubtful accounts, of $21.6 million. Marketable securities are invested in accordance with our investment policy, with a goal of maintaining liquidity and capital preservation. Our cash equivalents and
marketable securities are held in highly liquid money market funds, commercial paper, federal agency securities, and corporate debt securities.
Net
Cash Flows from Operating Activities
Net cash provided by operating activities was $17.9 million and $8.8 million for the six months
ended June 30, 2017 and 2016, respectively. The increase in operating cash flows as compared to the same period in 2016 was primarily due to increased net income along with increases in deferred income taxes, deferred revenue and other assets,
partially offset by a decrease in accrued compensation and the timing of accounts payable payments and accounts receivable receipts.
21
Net Cash Flows from Investing Activities
Net cash used in investing activities was $5.2 million and $27.1 million for the six months ended June 30, 2017 and 2016, respectively.
The decrease in net cash used in investing activities as compared to the same period in 2016 was primarily due to the acquisition of Toolbox Solutions for $18.1 million. For the six months ended June 30, 2017 and 2016, we purchased marketable
securities, net of maturities, of $1.4 million and $6.0 million, respectively and had capital expenditures of $3.3 million and $3.1 million, respectively. Our capital expenditures are for supporting our business growth and existing customer base, as
well as for our internal use such as equipment for our employees.
Net Cash Flows from Financing Activities
Net cash provided by financing activities was $2.2 million and $4.0 million for the six months ended June 30, 2017 and 2016, respectively,
from the exercise of stock options, proceeds from employee stock purchase plan and excess tax benefit from the exercise of stock options.
Effect of
Foreign Currency Exchange Rate Changes
Our results of operations and cash flows were not materially affected by fluctuations in
foreign currency exchange rates. We maintain approximately 12% of our total cash and cash equivalents outside of the United States in foreign currencies, primarily in Australian and Canadian dollars. We believe that a significant change in foreign
currency exchange rates or an inability to access these funds would not affect our ability to meet our operational needs.
Adequacy of Capital
Resources
Our future capital requirements may vary significantly from those now planned and will depend on many factors, including:
|
|
|
costs to develop and implement new solutions and applications, if any;
|
|
|
|
sales and marketing resources needed to further penetrate our market and gain acceptance of new solutions and applications that we may develop;
|
|
|
|
expansion of our operations in the United States and internationally;
|
|
|
|
response of competitors to our solutions and applications; and,
|
|
|
|
use of capital for acquisitions, if any.
|
Historically, we have experienced increases in our
expenditures consistent with the growth in our operations and personnel, and we anticipate that our expenditures will continue to increase as we expand our business.
We believe our cash, cash equivalents, marketable securities and our cash flows from operations will be sufficient to meet our working capital
and capital expenditure requirements for at least the next twelve months.
Inflation and changing prices did not have a material effect on
our business during the six months ended June 30, 2017 and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.
Off-Balance Sheet Arrangements
We do not
have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.
22
Contractual and Commercial Commitment Summary
Our contractual obligations and commercial commitments as of June 30, 2017 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period (in thousands)
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
Operating lease obligations
|
|
$
|
12,591
|
|
|
$
|
3,363
|
|
|
$
|
6,474
|
|
|
$
|
1,929
|
|
|
$
|
825
|
|